Bubble or Momentum? Can These Stocks Keep Their Recent Gains?

When a stock suddenly begins to climb, there's a temptation to jump on board in order to score some quick gains. The risk is a stock can go down as quickly as it goes up if there is nothing substantive to support the higher price. Here are three energy related companies experiencing strong price gains recently. Has the business changed enough to justify these higher prices?

Jul 5, 2014 at 11:44AM

One short-term investment strategy in known as a "momentum play." That is, a stock is going up and you invest thinking that by virtue of growing interest in the company, other investors will jump in, driving the stock even higher. The strategy has its merits. If a company announces better than expected earnings, offers enthusiastic guidance for future performance or a stock analyst makes a new recommendation, then a stock's momentum could certainly drive it higher.

The downside, of course, is if a company is rising but without any really good reason to, it could very well come right back down, and quickly. This happens when investors realize there is no substantive change to the company's business outlook and the momentum is just hype. Nefarious analysts have been known to buy a stock, hype it, and then sell when the publicity causes the stock to rise. This is commonly called "pump and dump." The Security and Exchange Commission takes a dim view of this sort of thing.

Recently, three different energy related companies have experienced significant rises in their stock prices. Are these companies pure momentum movers or is there a good reason for their stock performance?

An acquisition to buy for
Recently, Williams Companies (NYSE:WMB) announced it was increasing its investment is Access Midstream Partners. From the stock chart below, you can probably guess when the announcement was made.

 

WMB Chart

WMB data by YCharts

So what's the big deal? On its website, Access states boldly, "We deliver" and they're not kidding. Access consistently grew its distributions, from $0.2165 in November 2010 to $0.575 in May 2014. Access has multiple, 100% fee-based contracts typically for 20 years in some of the most productive natural gas shale plays in the US. All this portends growing distributable cash flows that will boost the bottom line for Williams.

Gas on the water
Asian countries pay a premium for natural gas and import growing volumes. Ernst and Young projects even more imports of natural gas, in the form of liquefied natural gas, or LNG, for the foreseeable future. LNG needs specialized ships to be transported from producer to customer called LNG carriers, and Golar LNG (NASDAQ:GLNG) operates seven such carriers.

Golar's climb actually began in February when it reported an earnings loss. The investor focus seemed to be on reports that Golar took delivery of two new vessels, successfully financed four of five LNG carriers under construction and raised $150 million in an equity offering. Three months later, earnings were in the black and a floating storage and regasification unit (a modified LNG carrier) took its first delivery of gas.

Most recently, Golar enjoyed another successful equity offering that seems to have touched off the latest growth in the stock's price. Proceeds from the offering were slated to help pay for the conversion of an LNG carrier to another floating storage and regasification unit.

A slew of new business
The growth of US energy production comes from the drilling technique known as hydraulic fracturing. Key to this technique is the use of so-called proppants to keep fractures in rock open and allow oil and gas to reach the surface. Hi Crush Limited Partnership (NYSE:HCLP) mines one of the most popular proppants used in the US: Northern White Sand.

Drillers in the US shale plays are using more sand or other proppants than ever. They are drilling more wells per drill site, drilling longer wells, and using more proppant per well on top of it all. So this bodes well for Hi Crush. This is not a secret, either. So why has Hi Crush done so well recently?

A spate of announcements regarding new or modified contracts seems to be the culprit. This past March, Hi Crush announced a new deal with US Well Services, LLC. A month later, the contract was amended to substantially increase minimum sand purchases. Another contract, this time with FTS International was similarly amended, followed by changes to a contract with Weatherford US LP. Liberty Oil Services signed a new five year contract for frac sand. Perhaps the proverbial icing on the cake was an amended contract with Halliburton.

Final Foolish thoughts
Of the three companies reviewed here, Golar strikes me as being on a bubble. True, Asian markets will demand Golar's LNG carriers, but right now there is not enough LNG production to fill the carriers already on the water. That will change, but not anytime soon. Golar looks like a good long-term investment, but I suspect it will likely drop in price before enjoying sustained earnings and stock price gains. Williams and Hi Crush offer investors more compelling reasons for their recent stock performance, namely an immediately accretive acquisition and multiple favorably amended contracts, respectively. Of these, I'd opt for Hi Crush since it sells an essential ingredient for hydraulic fracturing, and hydraulic fracturing is here to stay for a while.

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Robert Zimmerman owns shares of Williams Companies, Golar LNG and Hi Crush Limited Partnership. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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